# EUR-Lex - 52013PC0068 - EN

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# 52013PC0068

**Proposal for a COUNCIL DECISION authorising Latvia to introduce a special measure derogating from Article 26(1)(a) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax /* COM/2013/068 final - 2013/0043 (NLE) */**

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EXPLANATORY MEMORANDUM

1.           CONTEXT OF THE PROPOSAL

Ground and objectives of the proposal

Pursuant to Article 395(1) of Council
Directive 2006/112/EC of 28 November 2006 on the common system of value added
tax (hereafter 'the VAT Directive'), the Council, acting unanimously on a
proposal from the Commission, may authorise any Member State to apply special
measures for derogation from that Directive in order to simplify the procedure
for charging the tax or to prevent certain types of tax evasion or avoidance.

By letter registered with the Commission on
17 June 2011, the Republic of Latvia (hereafter 'Latvia') requested
authorisation to apply a measure derogating from the overall principles
governing the right of deduction. Latvia substantially amended this request via
a letter registered with the Commission on 27 August 2012. In accordance with
Article 395(2) of the VAT Directive, the Commission informed the other Member
States by letter dated 26 November 2012 of the request made by Latvia. By letter 30 November 2012, the Commission notified Latvia that it had all the
information it considered necessary for appraisal of the request.

General context

Articles 168 and 168a of the VAT Directive provide
that a taxable person is entitled to deduct the VAT charged on purchases made
for the purpose of taxed transactions. Article 26(1)(a) of the same Directive
requires the use of goods forming part of the assets of a business for private
purposes to be a supply of services for consideration if the VAT on the goods
was eligible for deduction. This system allows for the recovery of initially
deducted VAT in relation to the private use.

In the case of passenger cars, this system
is difficult to apply, in particular because it is difficult to identify the
split between private and business use. Where records are kept, they add an
additional burden to both the business and the administration in maintaining
and checking them; even in case Latvia would make use of the option provided
for in Article 168a(2) of the VAT Directive to limit the deduction on
expenditure related to company cars to the proportion of the taxable person's
effective business use.

Therefore, Latvia has requested to be
allowed to restrict the right of deduction at a set percentage of the initial
deduction and in turn to relieve the business from accounting for tax on the
private use. This has the benefit of simplifying the system for all concerned
and prevents, at the same time, tax evasion or avoidance because of incorrect
record keeping.

On the basis of information provided by Latvia, it appears that, on average, 20% of the use of business passenger cars is for
private purposes. The percentage restriction should therefore be set at 20%.

The new system will apply to all passenger
cars with a maximum of eight seats and under a certain weight that are not used
exclusively for business purposes. However, passenger cars which are used for
certain specific activities would be excluded from the restriction on the right
to deduct and would be treated under the normal rules: cars purchased for
resale, hire or lease; cars used for transportation of passengers (such as
taxis) or goods; cars used for driving lessons; cars used for guard or
emergency services; cars used as car sales demonstration vehicle.

On 29 October 2004, the Commission
presented a proposal for a Council Directive that includes a harmonisation of
the categories of expenses for which Member States may apply exclusions to the
right to deduct (the so-called VAT simplification proposal (COM(2004)728 final)).
As expenses in relation to passenger cars are included in this proposal, any
extension in the period of validity should not go beyond adoption and entry
into force of the proposed Directive. The derogation should in any case be
limited to 31 December 2015 if the proposed Directive has not come into force
by that date, in order to be able to assess whether the 20% restriction is still
a correct reflection of the overall apportionment between business and private
use. Any extension request should be accompanied by a report which includes a
review of the percentage applied and should be sent to the Commission with that
request by 31 March 2015.

Existing provisions in the area of the
proposal

Similar derogations in relation to right of
deduction have been granted to other Member States.

Article 176 of Directive 2006/112/EC
stipulates that the Council shall determine the expenditure on which the VAT is
not deductible. Until such time, it authorises Member States to maintain
exclusions which were in place on 1 January 1979. There are therefore a number
of "stand still" provisions restricting the right to deduct in
relation to passenger cars.

2.           RESULTS OF CONSULTATIONS WITH THE
INTERESTED PARTIES AND IMPACT ASSESSMENTS

Consultation of interested parties

Not relevant.

Collection and use of expertise

There was no need for external expertise.

Impact assessment

The Decision proposal aims in the first
place at simplifying the collecting of VAT in relation to passenger cars partly
used for non-business purposes and has therefore a potential positive impact.
At the same time, tax evasion via incorrect record keeping is countered.

However, because of the narrow scope of the
derogation and the limited application in time, the impact will in any case be
limited.

3.           LEGAL ELEMENTS OF THE PROPOSAL

Summary of the proposed action

Authorisation for Latvia to restrict the right of deduction to 80% of VAT incurred on expenditure in relation
to business passenger cars not exclusively used for business purposes. Where
that right to deduct has been limited, the taxable person is relieved from
accounting for VAT on the private use of the car.

Legal basis

Article 395 of the VAT Directive.

Subsidiarity principle

In accordance with Article 395 of the VAT
Directive, a Member State wishing to introduce measures derogating from the
said Directive must obtain an authorisation from the Council, which will take
the form of a Council Decision. Therefore, the proposal complies with the
subsidiarity principle.

Proportionality principle

The proposal complies with the
proportionality principle for the following reason(s).

The Decision concerns an authorisation
granted to a Member State upon its own request and does not constitute any
obligation.

Given the limited scope of the derogation,
the special measure is proportionate to the aim pursued.

Choice of instruments

Under Article 395 of the VAT Directive,
derogation from the common VAT rules is only possible with the authorisation of
the Council acting unanimously on a proposal from the Commission. Moreover, a
Council Decision is the most suitable instrument since it can be addressed to
individual Member States.

4.           BUDGETARY IMPLICATION

The proposal has no implication for the
union budget.

5.           OPTIONAL ELEMENTS

Review/revision/sunset clause

The proposal includes a sunset clause.

2013/0043 (NLE)

Proposal for a

COUNCIL DECISION

authorising Latvia to introduce a special
measure derogating from Article 26(1)(a) and Articles 168 and 168a of Directive
2006/112/EC on the common system of value added tax

THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the
Functioning of the European Union,

Having regard to Council Directive
2006/112/EC of 28 November 2006 on the common system of value added tax[1], and in particular Article
395(1) thereof,

Having regard to the proposal from the
European Commission,

Whereas:

(1)       By letters registered at
the Commission on 17 June 2011 and 27 August 2012, Latvia requested
authorisation to derogate from the provisions of Directive 2006/112/EC
governing the right to deduct input tax in relation to passenger cars.

(2)       The Commission informed
the other Member States by letter dated 26 November 2012 of the request made by
  Latvia. By letter dated 30 November 2012, the Commission notified Latvia that it had all the information it considered necessary for appraisal of the
request.

(3)       Articles 168 and 168a of
Directive 2006/112/EC establish a taxable person's right to deduct value added
tax (VAT) charged on supplies of goods and services received by him for the use
of his taxed transactions. Article 26(1)(a) of that Directive contains a
requirement to account for VAT when a business asset is put to non-business use.

(4)       The non-business use is
often very difficult to identify accurately and even where it is possible, the
mechanism for doing so is often burdensome. Under the requested authorisation,
the amount of VAT on expenditure eligible for deduction in respect of passenger
cars which are not used entirely for business purposes should, with some
exceptions, be set at a flat percentage rate. Based on information provided by Latvia, a rate of 80% is justifiable. At the same time, in order to avoid double taxation,
the requirement of accounting for VAT on the non-business use of passenger cars
should be suspended where they have been subject to limitation authorised by
this Decision. This simplification measure removes the need to keep records on private
use of business cars and, at the same time, prevents tax evasion through incorrect
record keeping.

(5)       The limitation of the
right of deduction under the authorisation should apply to VAT paid on the purchase,
leasing, intra-Community acquisition and importation of specified passenger
cars and on expenditure related thereto, including the purchase of fuel.

(6)       The authorisation should
only apply to passenger cars with a maximum authorised weight not exceeding
3500 kilograms and having not more than eight seats in addition to the driver's
seat. Any non-business use of passenger cars exceeding 3500 kilograms or having
more than eight seats in addition to the driver's seat is negligible due to
their nature or the type of business they are used for. A detailed list of
specific passenger cars excluded from that authorisation should also be
provided, based on their particular use.

(7)       On 29 October 2004, the
Commission adopted a Proposal for a Council Directive amending Directive
77/388/EEC with a view to simplifying value added tax obligations[2]. Directive 77/388/EEC has in
the meanwhile been replaced by Directive 2006/112/EC. That proposal includes
the harmonisation of the categories of expenses for which exclusions of the
right of deduction may apply. Under that proposal, exclusions to the right to
deduct may be applied to motorised road vehicles. It is therefore appropriate
to restrict the application period of this Decision until that Directive comes
into force. However, it is necessary to provide for a specific expiry date of the
authorisation if that Directive has not come into force by that date, as it is
necessary to review this authorisation and the percentage of overall
apportionment between business and private use.

(8)       Where Latvia would consider that an extension of the authorisation beyond 2015 is necessary, it
should submit to the Commission a report which includes a review of the percentage
applied together with the request for the extension no later than 30 March 2015.

(9)       The derogation will only
have a negligible effect on the overall amount of tax revenue collected at the
stage of final consumption and will have no adverse impact on the Union's own
resources accruing from VAT,

HAS ADOPTED THIS DECISION:

Article 1

By way of derogation from Articles 168 and
168a of Directive 2006/112/EC, Latvia is authorised to limit to 80% the right
to deduct the value added tax (VAT) on expenditure on passenger cars not wholly
used for business purposes.

Article 2

By way of derogation from point (a) of Article
26(1) of Directive 2006/112/EC, Latvia shall not treat as supplies of services
for consideration the use for private purposes of a passenger car included in
the assets of a taxable person's business, where that car has been subject to a
limitation authorised under Article 1 of this Decision.

Article 3

The expenditure referred to in Article 1 shall
cover the purchase, leasing, intra-Community acquisition and importation of
such cars as well as expenditure related to the maintenance, repair and fuel.

Article 4

Articles 1 and 2 shall only apply to
passenger cars with a maximum authorised weight not exceeding 3500 kilograms
and having not more than eight seats in addition to the driver's seat.

Article 5

Articles 1 and 2 shall not apply to the
following categories of passenger cars:

(a) cars purchased for resale, hire or lease;

(b) cars used for transportation of
passengers for a fee, including taxi services;

(c) cars used for the provision of
transportation of goods;

(d) cars used for the provision of driving
lessons;

(e) cars used for the provision of guard
services;

(f) cars used as an emergency vehicle;

(g) cars used as a car sales demonstration
vehicle.

Article 6

Any request for the extension of the authorisation
provided for in this Decision shall be submitted to the Commission by 30 March
2015.

Any request for extension of that authorisation
shall be accompanied by a report which includes a review of the percentage set
out in Article 1.

Article 7

This Decision shall expire on the date of
entry into force of Union rules determining the expenditure relating to
motorised road vehicles that is not eligible for full deduction of VAT, or on
31 December 2015, whichever is the earlier.

Article 8

This Decision is addressed to the Republic of Latvia.

Done at Brussels,

For
the Council

The
President

[1]               OJ L 347, 11.12.2006, p. 1.

[2]               COM(2004) 728 final